The Construction Contracts Act 2002 (the Act) codified a process for claiming and certifying payments under construction contracts whereby the contractor may claim for payment via a “payment claim”, and the payer may issue a “payment schedule” in response. If the payer fails to properly respond to the payment claim, or pay within strict statutory timeframes, the contractor can enforce the claimed amount as a debt due.
This is known as a “pay now, argue later” regime as it promotes recovery of payments for contractors irrespective of the dispute, and aims to uphold the stated purpose of the Act, that is, to facilitate regular and timely payments between the parties to a construction contract.
What is a payment claim?
Under the Act, this process is available to all construction work which has been defined broadly to include construction, erection, installation, carrying out, alteration, repair, restoration, renewal, maintenance, extension, demolition, removal or dismantling of any structure including infrastructure such as roads and utilities. It also includes design, engineering work, quantity surveying, painting, and plumbing.
A payment claim is more than a mere invoice.
For a payment claim to be valid, s 20 of the Act states that it must:
- Be in writing;
- Contain sufficient detail to identify the contract;
- Identify the work and relevant period to which the payment claim relates;
- State the amount claimed and the due date for payment;
- Indicate how the payee calculated the claimed amount;
- State that it is a payment claim under the Act; and
- Be accompanied by prescribed information under the Act.
The process
Once issued, the recipient has 20 workings days to respond to the payment claim with a payment schedule, unless the contract specifies a different time. The recipient of a payment claim has two options:
- Make payment in full by the due date; or
- Issue a payment schedule to dispute the amount claimed and pay a lesser amount (if any).
If the recipient fails to do either, it is legally barred from raising a defence (except on certain narrow grounds). Additionally, the contractor has a statutory right to suspend work until payment is received in full.
The Act also provides that the issuer of a payment claim is allowed to seek payment of its actual and reasonable costs of recovery (including legal costs) to enforce payment. This means that if the issuer is successful, it may be indemnified for its legal costs in enforcing the payment claim in addition to payment of the claimed amount.
Compliance with statutory requirements before the Courts
The Courts have taken a pragmatic approach by affording a degree of flexibility to non-compliance with the requirements for the issuance of a valid payment claim. Historically, the Courts have held that requirements (a), (f) and (g) must be strictly complied with, while requirements (b) to (e) can be satisfied if they are substantially complied with. The High Court has recently extended the substantial compliance test to requirements (f) and (g) in Poly Wealth Trustee Limited v Van Vlerken [2020] NZHC 346.
In the past, technical quibbles (which the Court found did not invalidate the issued payment claim) have included:
- An error in the date of the payment claim – Complete Construction Limited v Lyon Electrical Limited [2014] NZHC 3116.
- Failing to use the words “payment claim” – Herbert Construction Co Limited v Tuck Contractors Limited (in Liquidation) HC Napier CIV-2011-441-54, 22 July 2011.
- Mistakenly referring to the Act as the “Construction Contracts Act 2003”, instead of 2002 – Invent Solutions Limited v Chan Developments Trustee Limited [2009] NZCCLR 37 (HC).
- An error in the due date for payment, contrary to the terms of the contract – Pedestal Limited v City Build Construction Limited [2014] NZHC 1783.
It is noted that the issuer of a payment claim is unable to claim that a defect is a technical quibble if there has been no compliance whatsoever. That said, the Courts have taken a flexible approach by looking at the context in which payment claims are made and the knowledge of the parties involved in assessing compliance. For example, in McAlpine Hussmann Limited v Cooke Industries Limited HC Auckland CIV-2011-404-5663, 16 March 2012, the Court held that a tax invoice without any explanation of how the invoiced amount was calculated met the requirements given the payer’s knowledge of the circumstances.
However, given the strict requirements under the Act, it is always recommended to ensure the statutory requirements are strictly complied with to avoid the risk of the payment claim being declared invalid.
Why should contractors utilise payment claims?
We were recently engaged by a contractor who was owed significant amounts of money from the principal under a construction contract. The contractor did not issue payment claims to the principal. The contractor was experiencing financial difficulties and the construction contract did not provide the contractor with a right to suspend work for non-payment. In those circumstances, the contractor was contractually required to continue working for the principal even though it was not getting paid. This worsened the contractor’s financial position.
Had the contractor issued a payment claim, it could have relied on the statutory right to suspend work for non-payment. It could have also relied upon a statutory demand to recover the debt. This could have preserved its financial position and act as leverage to obtaining payment.
Accordingly, it is definitely worth issuing payment claims as a matter of practice.
Conclusion
Failure to issue a valid payment claim could result in having to initiate costly and drawn-out court proceeding to pursue the debt.
It is therefore prudent to have your payment claim checked to ensure that it complies with the Act before it is issued.
Contact us if you would like to receive a free payment claim template. Our lawyers at Norling Law are also happy to review your payment claim or discuss strategies to enforce your payment claim as part of our no obligation legal consultation. To book a free 30-minute consultation, please click this link https://norlinglaw.co.nz/consultation-brent/.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
Anna practices in the area of commercial litigation and has appeared as Counsel in the District Court, High Court and the Court of Appeal, having successes in all Courts. Anna has a special interest in corporate, insolvency and relationship property law.
Wendy has over 20 years’ experience in civil litigation in New Zealand with a main focus on construction, insolvency and debt recovery and security enforcement.